Author Topic: Would this be a good investment property?  (Read 5294 times)

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Would this be a good investment property?
« on: February 10, 2013, 08:47:34 PM »
There is a Condo for sale in the complex where I currently own a Condo that I'm underwater in. My condo is rented (used to be my primary residence). Because of this I'm very familiar with the condo setup. I used to rent out rooms to college age girls when I lived there easily. It's close to a local Law School and close enough to UNF.

Normally I wouldn't consider a condo at all because of the dues. However, I know that the property is well managed and while the dues are higher than I like, the President of the board fights to keep them from increasing as best as she can.

The condo is listed for $25,000 and is a one bedroom, one bath. The listing has no pictures but it claims it is move in ready. The monthly dues are $150. Conservatively I could rent it out for $500 but I think it would be closer to $650-$700. There would be no mortgage, it would be a cash buy. Which would completely deplete my savings (but that's what I've been saving for.) I don't think you can get a mortgage for under $50,000 and I don't think Lenders are lending for condos in my area anyways, but if possible I'd rather finance half and pay cash for the other half. I could possibly get a personal loan for half of it as well.

I would be self managing the property. I have a reliable handyman for repairs that is extremely affordable and a mother who is a Property Manager if that helps at all in any recommendations.

Thoughts from experienced investors?

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28235
  • Age: -999
  • Location: Seattle, WA
Re: Would this be a good investment property?
« Reply #1 on: February 10, 2013, 09:32:40 PM »
Sounds decent, but 500-700 is a HUGE range spread.  I wouldn't buy at the bottom of that range.  I might at the middle/top, depending on a few other factors (location, certain HOA issues, etc.). Still generally not a huge fan of lack of leverage in this low interest, low price environment.  Putting that 25k as 25% down on a 100k home could end up cash flowing just as much, but with 4x appreciation, depreciation, plus mortgage paydown and such.

First thing to do though is find out what rents actually are.  You should be able to nail it down within +/- $25.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Nords

  • Magnum Stache
  • ******
  • Posts: 3236
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Would this be a good investment property?
« Reply #2 on: February 10, 2013, 10:32:38 PM »
Thoughts from experienced investors?
If you own two units there, then the homeowner's association could be twice as bad as your worst nightmare.

Here are typical questions for concentrating your real estate ownership in one basket: 
How are the association's finances? 
How are they pursuing delinquencies & collections? 
Any ongoing disputes with the builder over construction defects?
What's the percentage of absentee owners?  (Most mortgage lenders are reluctant to lend to people buying into condos with low percentages of primary residents). 
How old are the common areas, roofs, parking lots, roads?
How's their liability insurance for the pool?
Is the HOA involved in any pending lawsuits?  (Trick question-- the pending lawsuits never end, only the degree of bad news.)
What would happen to your finances if the HOA levied an assessment for anywhere from $1000-$10,000 for various repairs/projects?

My impression of HOAs under 250 units is that the talent pool is too shallow for good management, and even if they hire a professional property manager they're still at significant risk of being ripped off.

You've identified a potential opportunity, but that just means it's time to start the due diligence.  Arebelspy and the other real estate experts can guide you through the math, or you could start with Frank Gallinelli's real estate math blog:  http://realdata.com/blog/

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28235
  • Age: -999
  • Location: Seattle, WA
Re: Would this be a good investment property?
« Reply #3 on: February 11, 2013, 07:03:12 AM »
you could start with Frank Gallinelli's real estate math blog:  http://realdata.com/blog/

I second this, Gallinelli knows his stuff.  I enjoyed his book (What Every Investor Needs to Know About Cashflow...), and he just did an interview via podcast on BiggerPockets if you want more of him.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #4 on: February 11, 2013, 07:34:43 AM »
Thoughts from experienced investors?
If you own two units there, then the homeowner's association could be twice as bad as your worst nightmare.

Here are typical questions for concentrating your real estate ownership in one basket: 
How are the association's finances? 
How are they pursuing delinquencies & collections? 
Any ongoing disputes with the builder over construction defects?
What's the percentage of absentee owners?  (Most mortgage lenders are reluctant to lend to people buying into condos with low percentages of primary residents). 
How old are the common areas, roofs, parking lots, roads?
How's their liability insurance for the pool?
Is the HOA involved in any pending lawsuits?  (Trick question-- the pending lawsuits never end, only the degree of bad news.)
What would happen to your finances if the HOA levied an assessment for anywhere from $1000-$10,000 for various repairs/projects?

My impression of HOAs under 250 units is that the talent pool is too shallow for good management, and even if they hire a professional property manager they're still at significant risk of being ripped off.

You've identified a potential opportunity, but that just means it's time to start the due diligence.  Arebelspy and the other real estate experts can guide you through the math, or you could start with Frank Gallinelli's real estate math blog:  http://realdata.com/blog/

The Associations finances are ok, not great. The developer stiffed us in fully funding our initial operating account and their is a lawsuit ongoing about this. The board has been tenacious about following up with this.

They are pursuing delinquencies and collection with pretty good success. We had a lot of units go delinquent. They are foreclosing on some units and renting them out. Other have been sent to a collection law firm and have them on payment plans. The last meeting I attended they were listing off the amount back of dues payments they had received.

There is a cap on the amount of absentee owners allowed by our bylaws, but in the current economy I do not think it is enforced. When I purchased my unit I made them add an addendum to my unit that I wouldn't have to follow that rule though.

The common areas are well maintained and the roofs are scheduled to be replaced as needed and a few already have been. The board does a good job of managing the property. These have all been handled via operating and improvement accounts. After going through four property management companies over the first couple years I lived there they finally found a good one.

You bring up a great point that I hadn't considered about the extra assessments. Knock on wood, to date over the six years I've owned my condo there has not been an extra assessment and the board does everything they can to avoid them.

The bad thing is my dues started out around $200/month for the largest unit and now are $335. This is over the course of six years. The small unit I think started around $79 and is now $150.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28235
  • Age: -999
  • Location: Seattle, WA
Re: Would this be a good investment property?
« Reply #5 on: February 11, 2013, 07:47:49 AM »
The Associations finances are ok, not great. The developer stiffed us in fully funding our initial operating account and their is a lawsuit ongoing about this. The board has been tenacious about following up with this.

They are pursuing delinquencies and collection with pretty good success. We had a lot of units go delinquent. They are foreclosing on some units and renting them out. Other have been sent to a collection law firm and have them on payment plans. The last meeting I attended they were listing off the amount back of dues payments they had received.

There is a cap on the amount of absentee owners allowed by our bylaws, but in the current economy I do not think it is enforced. When I purchased my unit I made them add an addendum to my unit that I wouldn't have to follow that rule though.

The common areas are well maintained and the roofs are scheduled to be replaced as needed and a few already have been. The board does a good job of managing the property. These have all been handled via operating and improvement accounts. After going through four property management companies over the first couple years I lived there they finally found a good one.

You bring up a great point that I hadn't considered about the extra assessments. Knock on wood, to date over the six years I've owned my condo there has not been an extra assessment and the board does everything they can to avoid them.

The bad thing is my dues started out around $200/month for the largest unit and now are $335. This is over the course of six years. The small unit I think started around $79 and is now $150.

(Emphasis mine.)

Bold #1 makes me think it was built relatively recently.  Bold #2 makes me think it's pretty old.

Or, combining the two, it was built recently, but shoddily?

The limit on out of state owners is a huge red flag as an investment property.  Sure, they aren't enforcing it now, but what happens when they start?  Forced vacancies.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #6 on: February 11, 2013, 07:48:15 AM »
Sounds decent, but 500-700 is a HUGE range spread.  I wouldn't buy at the bottom of that range.  I might at the middle/top, depending on a few other factors (location, certain HOA issues, etc.). Still generally not a huge fan of lack of leverage in this low interest, low price environment.  Putting that 25k as 25% down on a 100k home could end up cash flowing just as much, but with 4x appreciation, depreciation, plus mortgage paydown and such.

First thing to do though is find out what rents actually are.  You should be able to nail it down within +/- $25.

That's a good point. I just don't know if I would qualify for an investor loan on a $100,000 property. Because I'm upside down in my original condo that I purchased as a primary residence in 2006 I've had trouble even refinancing my current residence. This is despite having a perfect payment history on every loan I've ever had including two mortgages and making a good salary and having money in the bank.

I guess that's why I like this property because I could buy it without having to deal with a lender.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #7 on: February 11, 2013, 07:49:13 AM »
The Associations finances are ok, not great. The developer stiffed us in fully funding our initial operating account and their is a lawsuit ongoing about this. The board has been tenacious about following up with this.

They are pursuing delinquencies and collection with pretty good success. We had a lot of units go delinquent. They are foreclosing on some units and renting them out. Other have been sent to a collection law firm and have them on payment plans. The last meeting I attended they were listing off the amount back of dues payments they had received.

There is a cap on the amount of absentee owners allowed by our bylaws, but in the current economy I do not think it is enforced. When I purchased my unit I made them add an addendum to my unit that I wouldn't have to follow that rule though.

The common areas are well maintained and the roofs are scheduled to be replaced as needed and a few already have been. The board does a good job of managing the property. These have all been handled via operating and improvement accounts. After going through four property management companies over the first couple years I lived there they finally found a good one.

You bring up a great point that I hadn't considered about the extra assessments. Knock on wood, to date over the six years I've owned my condo there has not been an extra assessment and the board does everything they can to avoid them.

The bad thing is my dues started out around $200/month for the largest unit and now are $335. This is over the course of six years. The small unit I think started around $79 and is now $150.

(Emphasis mine.)

Bold #1 makes me think it was built relatively recently.  Bold #2 makes me think it's pretty old.

Or, combining the two, it was built recently, but shoddily?

The limit on out of state owners is a huge red flag as an investment property.  Sure, they aren't enforcing it now, but what happens when they start?  Forced vacancies.

You're right on both counts. It's old and was built recently. It was an old apartment copmlex that was converted to condos. The original building was built in 197something. The condo conversion was in 2005/2006.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28235
  • Age: -999
  • Location: Seattle, WA
Re: Would this be a good investment property?
« Reply #8 on: February 11, 2013, 08:31:18 AM »
I just don't know if I would qualify for an investor loan on a $100,000 property. Because I'm upside down in my original condo that I purchased as a primary residence in 2006 I've had trouble even refinancing my current residence. This is despite having a perfect payment history on every loan I've ever had including two mortgages and making a good salary and having money in the bank.

I guess that's why I like this property because I could buy it without having to deal with a lender.

Being underwater won't have anything to do with your getting a current loan.  Credit score, income, and DTI is what matters.  If you only have one mortgage right now, it should be pretty easy for you to qualify if you have a 700+ credit score (hopefully 725+) and not much debt payments (amount of debt doesn't matter, monthly payments do) versus your income.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #9 on: February 11, 2013, 08:47:25 AM »
I have two mortgages and three properties (one mortgage covers my primary residence and a separately metered and addressed apartment). My credit score is about 700. I receive $700 in rent for my garage apartment a month and after management fees $922 in condo rent. The problem is I am cash flow negative on the condo because of my dues. The rent almost covers my mortgage but then I have $335/month in dues.

Edited to add: My two mortgages combined add up to: $2796. After rent is $1175. I also receive $750 a month from my Fiance which brings it down to $425.00 (I pay all utilities and maintenance on the property.) However as the "rent" from my Fiance is recent and not on my 2011 tax returns the lender doesn't count it.

I was able to get a refinance quote from a local lender on my primary residence but the interest rate was almost 7%. So I'm doing a streamline refinance with Wells Fargo which will bring is down to 3.75% from 4.75%.

I won't know until I try to get a pre-approval, but the lenders are being very, very conservative at least with my recent experiences.
« Last Edit: February 11, 2013, 08:51:37 AM by freelancerNfulltimer »

Nords

  • Magnum Stache
  • ******
  • Posts: 3236
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Would this be a good investment property?
« Reply #10 on: February 11, 2013, 09:07:47 AM »
The bad thing is my dues started out around $200/month for the largest unit and now are $335. This is over the course of six years. The small unit I think started around $79 and is now $150.
Every time I get tired of yardwork look at downsizing to a condo, I feel that the HOA fees don't offer good value for the expense-- even when the association is well-run and has a decent property manager. 

On the upside, you're near a college town with plenty of potential tenants and possibly a huge cash-on-cash return.  (Far better than my area.)  On the downside, college tenants may have difficulty swinging a 1BR rent without a parental co-signer or being a couple who's willing to share that BR.  You'd have to check the comps on 1BRs in that neighborhood to see if you'd have any hope of reselling it.  The low purchase price may already be signaling an answer to that question.  Even for 6%, a realtor only gets $1500.  I wonder if that even leaves them earning minimum wage on a sale.

Having said that, you've identified an opportunity and you can do the due diligence to decide whether it's worth concentrating your investments around this risk.  There's a big "sleep at night" factor.  It'd be easier to take on the risk if this investment wasn't tying up so much of your net worth, but you'd certainly be in a position to exert more control than you'd get from investing in a Vanguard stock index fund.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #11 on: February 11, 2013, 11:33:42 AM »
The bad thing is my dues started out around $200/month for the largest unit and now are $335. This is over the course of six years. The small unit I think started around $79 and is now $150.
Every time I get tired of yardwork look at downsizing to a condo, I feel that the HOA fees don't offer good value for the expense-- even when the association is well-run and has a decent property manager. 

On the upside, you're near a college town with plenty of potential tenants and possibly a huge cash-on-cash return.  (Far better than my area.)  On the downside, college tenants may have difficulty swinging a 1BR rent without a parental co-signer or being a couple who's willing to share that BR.  You'd have to check the comps on 1BRs in that neighborhood to see if you'd have any hope of reselling it.  The low purchase price may already be signaling an answer to that question.  Even for 6%, a realtor only gets $1500.  I wonder if that even leaves them earning minimum wage on a sale.

Having said that, you've identified an opportunity and you can do the due diligence to decide whether it's worth concentrating your investments around this risk.  There's a big "sleep at night" factor.  It'd be easier to take on the risk if this investment wasn't tying up so much of your net worth, but you'd certainly be in a position to exert more control than you'd get from investing in a Vanguard stock index fund.

I agree that what you get for the dues don't justify the amount at least in my situation. My mother is a licensed real estate agent and I could have her list and show a property for me if I wanted to sell. So I'm not too concerned about that.

I feel confident in my ability to find a tenant and manage the property. I used to rent out two bedrooms in my 4 bedroom condo when I lived in it for between $450-$500 each with no vacancies. Most of the girls did have their parents paying their rent as the majority of them were college students. The others were recent graduate just starting out.

However, I called the listing agent today and the property is no longer available. So it turns out it's all a moot point anyway.

So I'll continue to keep an eye out for other options. Thanks for everyone's input it was all helpful and I appreciate it.

chatsc

  • Stubble
  • **
  • Posts: 116
Re: Would this be a good investment property?
« Reply #12 on: February 11, 2013, 12:00:53 PM »
a condo is listed for 25K$?  that is insane.  I live in Ottawa and trailer parks are the only thing you see under 100K...barely.

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #13 on: February 11, 2013, 12:11:55 PM »
a condo is listed for 25K$?  that is insane.  I live in Ottawa and trailer parks are the only thing you see under 100K...barely.

There are lots of condo in my area that are under $50,000. The problem with them is some have issues with how they were developed. One community has a wide spread mold problem. Another had to have ALL the balconies redone. Plus the condo dues eat into any potential rental profits. (I hear a lot about the issues from my mom who manages a large Property Management office.)

My area was one of the hardest hit in the real estate bubble burst. Things are starting to sell and prices are starting to creep up very slowly but there are still lots of deals to be had especially if you're a cash buyer.

chatsc

  • Stubble
  • **
  • Posts: 116
Re: Would this be a good investment property?
« Reply #14 on: February 11, 2013, 12:27:29 PM »
I just find it shocking that a person can buy a 1 bedroom condo for the same as a new sedan.  It makes me think that I don't fully appreciate how devistating the real estate problem is in the US. 

freelancerNfulltimer

  • Stubble
  • **
  • Posts: 157
Re: Would this be a good investment property?
« Reply #15 on: February 11, 2013, 12:48:44 PM »
I just find it shocking that a person can buy a 1 bedroom condo for the same as a new sedan.  It makes me think that I don't fully appreciate how devistating the real estate problem is in the US.

It was a market correction. The homes where never worth what they were selling for in 2006. Many experts have been cautioning that Canada is due for its own market correction. Not to wish ill on anyone of course, and I'm speaking as a sucker who paid way too much for a property at the height of the market but you may find prices come down in Canada in the near future.

chatsc

  • Stubble
  • **
  • Posts: 116
Re: Would this be a good investment property?
« Reply #16 on: February 11, 2013, 02:04:57 PM »
I am naive about how bad the economy actually is, or can get.   I live in Ottawa, and was spared in our recent round of federal job cuts, but things do happen....

Good thing I found this blog, so I can make sure that every penny (or dime I guess, because we no longer have pennies) is well spent (and well saved.)

That being said, a condo for 25K still is craziness for me.  The idea of buying a 1 bedroom condo for under 140K is a "good deal" in Ottawa.  A market correction would be interesting. 

We are trying to sell a piece of waterfront vacant land and having no luck.  We were going to build a cottage but then realized that it was too much of an endeavor for us, at this stage in our lives. 


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28235
  • Age: -999
  • Location: Seattle, WA
Re: Would this be a good investment property?
« Reply #17 on: February 11, 2013, 02:19:04 PM »
We are trying to sell a piece of waterfront vacant land and having no luck. 

That means you are asking too much.

Hopefully you can sell before there is a correction, so you don't hit a scenario where you wish you would have taken what you could have gotten.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.